Leaking Umbrellas

Over the past few months Devant has been assisting numerous clients in various aspects of subcontracting, often to one-man-band subcontractors. This is such a common situation that you’d expect everyone to be aware of the issues, but alas no.

Problems commonly arise from the commercial terms, as most subcontractors want to make it as hard as possible for the client to get rid of them yet want to be able to exit of their own free will with 5 minutes notice. However, issues also occur due to the demands of inland revenue legislation and IR35.

Unless you have a contract with the subcontractor that clearly establishes that they are not an employee, you could be liable for income tax and National Insurance Contributions for that person.

This isn’t as simple as just stating that they aren’t an employee, but stretches much further. For example:

• the subcontractor’s ability to provide a substitute worker
• the place of work and equipment used
• the nature of the subcontractor’s obligation to provide services

You also need to ensure that you both do actually operate in accordance with the contract, as the courts have a mixed response to workers who subsequently try to claim to be employees; some succeed and some don’t.

The implications for the ‘employer’ can go far beyond tax issues. If you are judged to have been acting as an employer, you could owe the worker holidays, sick pay and any other benefits to which they would have been entitled as an employee.

So where do the leaking umbrellas come in? Well, IR35 is a piece of legislation that centres on intermediaries. It aims to stop subcontractors using intermediaries, such as partnerships and service companies, as a means of avoiding tax, specifically income tax and NICs.

Some of these intermediaries or ‘umbrella’ companies suggest they can save a subcontractor money, represent them better than they would be as a self-employed sole trader and negotiate them better contracts. Yet we have seen contracts where a substantial monthly fee is paid by the subcontractor to be an employee of the umbrella company and yet the contract actually reduces their rights rather than improving them. It also often leaves the client with a contract signed by an intangible third person rather than the subcontractor with whom they are working.

Our advice to clients?
Take legal advice to ensure your subcontractor agreements work for you and protect you as far as possible.

Our advice to subcontractors?
Beware of leaking umbrellas. Make sure you fully understand the implications of your contracts before you sign and seek legal advice if you are unsure.